Lawyers are undoubtedly highly skilled legal experts. They can, however, sometimes fall short in the financial department. Below are a couple of tips on how you can avoid common financial mistakes that law firms make (which would otherwise potentially negatively affect, productivity and profitability).
Spending Too Much Too Quickly
Legal firms often spend too much money too soon on things that can wait. If a certain area of the firm (e.g. collections) is doing very well, there is no need to immediately increase administrative staff. Consider outsourcing that part of the job so you will be able to quickly bring in temporary administrative staff when you become too busy to return emails or answer the phone.
Not Spending Enough
While spending too much will negatively affect your law firm’s profitability and is one of the most common financial mistakes that law firms make, so will spending too little in areas that are important to increase productivity and sales. Examples include:
Not investing enough in branding and marketing
Branding and marketing are at the heart of every legal firm’s sales pipeline. People who don’t know that you exist will never become your clients. No matter how tight the economic situation is, you have to allocate time and money to marketing. Cutting back in this department will start by throttling growth and could eventually kill the business.
Not appointing new core staff members when needed
There is a vital difference between reducing non-essential staff and cutting back on appointments that would make or break your legal firm. In the case of law firms that have more business they can handle, delaying the appointment of new associates will mean you have to turn away new business. That should never happen. Plan at least a year in advance and if your projections show that there will be a need for staff in a particular area of the business, do what is necessary.
Not Investing enough in productivity-enhancing technology
Technological tools such as hardware and software can play a major role in reducing costs and thereby boosting profits. Just think how many staff members your accounting and billing section would have needed today without modern tools such as computers, accounting software, billing software, etc. It doesn’t stop there. Leading law firms are already using AI systems to answer the phone and case management software that can dramatically reduce the time spent on a job.
Failure to keep up with technology could be the one financial mistake that eventually ruins your legal firm.
Trying To Cut Corners When It Comes To Staff Appointments
We have already seen above how spending too much on non-productive staff could harm the firm’s bottom line. And how not spending enough on vital expertise could also be damaging. Another financial mistake that law firms make is to hire under-qualified staff who are prepared to work for less.
This mostly happens in those parts of the business that are not directly bringing in money, such as accounting and admin. The last thing you need is for your firm to be audited next year because it failed to submit the necessary statutory returns, mismanaged its trust account, or didn’t pay over VAT or other taxes in time. Make sure you have people with the necessary qualifications and experience onboard or outsource the work if doing it in-house is too expensive.
Relying Too Much On Per Hour Billing
Some legal firms make the crucial financial mistake of relying too much on total billable hours as a profitability metric. This is one of the most common financial mistakes that law firms make, and often results in over-remuneration and inefficiency. Modern-day clients often insist on alternative fee arrangements that offer better value for money. New pricing models have emerged, including fixed fees, threshold discounting, caps, etc. These require legal businesses to measure partner performance more precisely (through profitability and productivity metrics).